Why Invest in Bonds?

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Why Invest in Bonds?

Bonds are thought to be an investor's idea of a safe investment. When the stock market is in trouble, investors take their money from the equity market and put it into bonds. Also, investors feel bonds are perfect for a portfolio where they require some sort of fixed income. A bond's coupon payment would work nicely in this case. However, research may lead us to a different story. Is a bond a better overall investment during these two situations listed above, and many others like them? Peter Lynch, former fund manager at Fidelity for the Magellan Fund, and author of "Beating the Street", does not think so. Lynch feels that no matter what the circumstance, stocks will always outperform bonds (Lynch, 15).

In the beginning of Lynch's story on stocks versus bonds, Lynch is quick to point out that (in 1993 when the book was written) 90 percent of the nation's investment dollars are not in stocks, but in bonds, certificates of deposit, or money-market accounts. This almost makes it seem like investors are afraid of the stock market, or more so the risk associated with the market's volatility. An example of this is the 1980s, when stocks had their second best returns overall for the decade, topped only by the 1950s. During that time in the 1980s, the percentage of household assets invested in stocks declined and has been declining since the 1960s, from 40 percent to 25 percent in 1980 to 17 percent in 1990. As well, investment in equity mutual funds declined from 1980 to 1990 by nearly 39 percent. Lynch's biggest quarrel with this is the fact that major stock indexes including the Dow Jones average were quadrupling during these time periods. (Lynch, 15) If investors had put and kept their mone...

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[3] http://www.globalaging.org/pension/us/private/StokBond.htm

Bibliography

Fisher, Kenneth L. (2002). Bonds, Not Books. Published on the Web 12/9/02. http://www.forbes.com/free_forbes/2002/1209/206.html

Lynch, Peter, with Rothchild, John. (1994). Beating the Street. New York: Fireside.

National Center for Health Statistics. (2000). Fast Stats A to Z: Life Expectancy. Published on the Web 11/5/02.

http://www.cdc.gov/nchs/fastats/lifexpec.htm

Pryor, Austin, with Biller, Mark. (2002). Stocks vs. Bonds: Picking the Right Mix for Your Situation. Published on the Web 11/1/02. http://www.soundmindinvesting.com/vsection/v_newsletter/0211/feature.htm

Schultz, Abby. (2002). Stocks vs. Bonds: A Risk Scoreboard. New York Times 6/30/02. http://www.globalaging.org/pension/us/private/StokBond.htm

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